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Saturday, February 14, 2009

How Bad Will it Get?

It's not looking good. Many people have been trying to make the case that the current downturn is no worse than the downturns in the 1970s and 1980s, but there's reason to think this downturn is following a different, more worrisome trajectory:

Unemployment in the current crisis, by Mike Elsby, Bart Hobijn, and Aysegul Sahin, Vox EU: ...A useful rule of thumb exploited in recent research is that the percentage increase in unemployment is well-approximated by the percentage increase in inflows plus the percentage increase in duration of unemployment (Elsby, Michaels, and Solon 2009). Figure 1 plots these for each US recession since 1969, including the current crisis (shaded). In some ways, the current recession looks much like previous downturns. Inflows as well as duration have contributed to increased unemployment in much the same way as in the recessions of 1969 and 1974. But other dimensions of the current crisis are more alarming. Unemployment inflows have already grown by more than 30% since the beginning of the unemployment ramp up – faster rates of job loss have played a particularly dominant role relative to previous downturns.

If the current crisis evolves similarly to earlier episodes, these elevated rates of job loss do not bode well for unemployment prospects in 2009. A pattern observed in prior recessions has been that increased inflows are often a precursor to increased duration and further increases in unemployment (see Figure 1). This pattern suggests that further weakening of the labour market looms on the horizon, an outcome that would amount to a recession more severe than any seen in the US in the last forty years. This highlights the important need for a successful US stimulus package to stem the tide of a worsening macroeconomic situation in 2009.

Figure 1. Percent changes in US unemployment inflow rate and duration by recession


Figure 1 also highlights a curious fact absent in popular discussions of the crisis. Unemployment in the US had already begun to ramp up in early 2007, long before the official recession start date in December 2007 and the vagaries of the financial crisis that came to a head in the latter half of 2008. Figure 1 suggests that the initial impulse to the current recession may not have been the credit crunch, but rather that the credit crunch aggravated already worsening economic conditions. ...

    Posted by on Saturday, February 14, 2009 at 12:42 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (41)


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